Friday, October 18, 2013

Stocks - Time to Sell?

Today, I sold some stock.  This was a momentous occasion because this was a first for me.  The last few years, in my IRA, I have been buying individual stocks (my 401k is mutual funds).  As of today, I had 21 stocks and my "change since purchase" (this would be my return if I sold everything) is in the 70s%.

Now, before you commend me on my stock picking skills, let me tell you that I am not an expert and you shouldn't be following my investment advice.  Secondly, I really started buying stocks in 2009, in particular March 2009, so much of my gains is as a result of a dramatic increase in the market between March 2009 and now.  Thirdly, I pick most of my stocks utilizing Fidelity's Preset Expert Strategies, so I am working off of expert research and not some particular skill on my part.

So, as I have been working on research for investing my 2013 Roth IRA monies, I noticed that I have several stocks that have done quite well.  One stock was up 500% in less than a year.  As a result, I was looking for some advice on whether to sell or not.  Thankfully there is a lot of good research available to read on the topic.

First, I realized that I am not setting any goals when I buy stocks.  And, sometimes you don't need to set a goal if this is a stock, i.e. blue chip, that one plans to hold for many years.  But, on some of my more riskier investments I should be figuring out what I want to get out of the purchase and then "pull the trigger" when that event hits.  For an example, if I buy stock XYZ at $10 a share and my goal is to triple my money, I need to set that as a goal and then set up a limit order to sell when it reaches that number.

Second, tax implications (and note I am not a tax expert either, and we were audited by the IRS so you really should not rely on any tax discussions that you read here).  Since, I am buying and selling within a Roth IRA there are no tax implications.  But, if I were selling this stock that I bought less than a year ago in a trading account I would be paying short term capital gains.  Roth IRAs are awesome because that $4,300 I earned today is tax free.

So, yes, I ended up selling my super hot stock, profiting and pocketed $4,300, tax free, and . . . .  I had immediate regrets.

Even though I set a well researched limit order to sell at a price that I thought was reasonable, the stock went even higher today.  Bummed, is how I feel, I could have made more money and I worry whether I could have made even more money by holding on to it.  I expect that I will continue to stalk this stock in the future to see how much more I "lost" out on.

The lesson I learned, among others, is that if I set certain goals for my stock purchases and I hit those goals I will feel better about my plan rather than being caught up in the exuberance of one hot stock.

How do you buy (and sell) stocks?  Do you have a goal or plan for each at time of purchase?


Anonymous said...

I consider owning Individual stocks too risky. I own thousands of stocks in index funds which cover the entire stock market - much more diversified. If you bought in 2009, a 70% return is less than the overall market gain (the S&P 500 has increased 110% since April, 2009).

Dan said...

Hey Sam, I do what you are talking about, when I get into a stock, I'm in it for one of two reasons, steady divs that always increase, or a target price I am looking for. Once you hit your price, I think it is a good idea to separate the emotions and just sell. It sometimes is hard to do, but more often then not is worth it. Just remember, there are always deals out there!

For anonymous, to each his own, a S&P Index will keep you on pace with the rest of the world. But will never get you ahead the way well researched individual stocks can.

Anonymous said...


Individual stocks make up a small portion of the portfolio and I don't have a set plan of when to sell.

However, an interesting outcome was that when I decided to allocate some stocks I owned to funds that I was saving for graduate school after several months I starting selling off some of the stocks. I put some funds in a diversified stock/bond fund, some in cash, and kept some in the stock. I did not want to jeopardize my goal. Well, I went through the recession just fine with this portfolio.

Having a goal gave me direction.

Although this is not always the case, we bought an out of favor stock in 2009 and ended up with several years of tax write offs. No goal for this stock.


Anonymous said...

This is a scary, scary thread!!!

First, to Tina's comment. The only way you get tax write-offs when you sell a stock is if you sell it at a loss or give it to charity. In rare cases, you might get a write-off if the company is a master limited partnership. Until this comment if further explained, it should be disregarded.

Second, to the idea of setting a future sale to some multiple of the price you paid. This is just a bad idea because your multiple is completely arbitrary and has nothing to do with the company or its success in business or what the market is willing to pay. Sales prices should be based on your estimate of whether the company is undervalued or overvalued. How you might determine that is a long discussion in itself, but if you're not willing to do the work, you should really just buy a whole market fund or ETF and never sell.

As for Dan's comment about separating emotions, setting a random price point to sell is pretty emotional. Someday, the stock may get to your target, or the company may go bankrupt and you'll lose everything. One of the biggest mistakes individual investors make is holding onto a loser until they're back to even (not to mention 3x even).

Finally, Sam, you've commented about regret and anxiety about selling before. And you got good advice, which you obviously ignored. Doing the same thing and expecting different results... well, I'm sure you know what that is.

Dan said...

Never said that individual stocks were a set it and forget it strategy. And absolutely neverrr said "random price point." They need to be reviewed and reanalyzed as often as new important information about them comes out, along with key economic indicators.

Anonymous said...

Dan Said,

For anonymous, to each his own, a S&P Index will keep you on pace with the rest of the world. But will never get you ahead the way well researched individual stocks can.

I agree with the anonymous "scary thread" remark. There are plenty of statistics and books which show a low cost index fund will consistently beat an actively managed fund or a group of hand picked stocks - as evidenced by Sam's return of 70% compared to the S&P 500 return of 110% since 2009.

Dan said...

Or you could have just selected Ford stock over that same period and returned over 400%. You can hand pick a date range and make almost any investment look good.

All those books are using old data in my opinion. Before algorithmic trading, hedge funds, derivatives etc. Times have certainly changed.

Since the turn of the century the S&P 500 has returned 22%. Total. Hasn't even beat inflation during that time. I'm just of the belief that indexes are the safe way to modest returns nowadays. The little guys gets the profit leftovers, while the big guys take the real returns.

Once again, to each their own. I just have a different belief on the subject. Don't see anything scary about it. I promise, I'm doing just fine.

Anonymous said...

American Association of Individual Investors: "It should come as no surprise that behavioral finance research makes a strong case for buying and holding low-cost, broadly diversified index funds."

Mark Balasa, CPA, CFP: "That three-pronged approach is going to beat the vast majority of the individual stock and bond portfolio that most people have at brokerage firms. There is a certain elegance in the simplicity of it."

Christine Benz, Morningstar Director of Personal Finance: "A single, broadly based index fund can give you exposure to the whole stock or bond market, enabling you to build an entire portfolio with just one or two funds."

Bill Bernstein, author, adviser: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."

Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- The ideal portfolio would combine Vanguard Total Stock Market Index and Vanguard Total Bond Market Index with a splash of Vanguard Total International Stock Market Index if you must."

Warren Buffett: "Most investors, both institutional and individual, will find that the best way to own common stocks is through in index fund that charges minimal fees."

Scott Burns, columnist, author: "The odd are really, really poor than any of us will do better than a low-cost broad index fund."

Jonathan Burton, MarketWatch: "There are plenty of ways to complicate investing, and plenty of people who stand to make money from you as a result. So just think of a three-fund strategy as something you won't have to think about too much."

Andrew Clarke, author: "If your stock portfolio looks very different from the broad stock market, you're assuming additional risk that may, or may not, pay off."

Jonathan Clements, author and former Wall Street Journal columnist: "If you want a surefire strategy for outpacing most other U.S. stock investors, simply shovel money into an index fund that tracks a broad U.S. market index such as the Wilshire 5000 or the Russell 3000."

John Cochrane, President American Finance Association: "The market in aggregate always gets the allocation of capital right."

Consumer Reports Money Book: "Simply buy the market as a whole."

Charles Ellis, author: "The great advantage of an index fund that replicates the overall market is this: Such a fund provides a convenient and inexpensive way to invest in equities, with the riskiness of particular market segments and specific issues diversified away."

Prof. Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

Paul Farrell, CBS: "Where does Fama invest his retirement money? 'In index funds. Mostly the Wilshire 5000.' "

Rick Ferri, Forbes columnist, author, adviser: "The older I get, the more I believe the 3-fund portfolio is an excellent choice for most people. It's simple, cheap, easy to maintain, and has no tracking error that would cause emotional abandonment to the strategy."

Graham/Zweig, authors: "The single best choice for a lifelong holding is a total stock-market index fund."